1995 (2) TMI 301 - HC - Companies Law

Summary

Issues Involved:

1. Priority of liabilities under Section 11 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992.
2. Definition of "taxes" under Section 11 of the Special Court Act.
3. Levy of penalty and interest on notified parties after the date of notification.

Detailed Analysis:

1. Priority of Liabilities Under Section 11 of the Special Court Act:

The primary issue was whether the priority created by Section 11 of the Special Court Act applies only to amounts due prior to the date of notification or also to amounts due after the date of notification. The court examined the interpretation of "liabilities" and "due" in Section 11, noting that the term "due" implies a fixed and settled obligation or liability. The court referenced Black's Legal Dictionary and P. Ramanatha Aiyar's Law Lexicon to define "due" as an existing obligation that is either presently payable or will become payable in the future.

The court concluded that the priority under Section 11 applies to liabilities due up to the date of notification. The court emphasized that the Special Court Act aimed to recover and distribute assets swiftly to banks and financial institutions, and applying priority to liabilities accruing after the notification would indefinitely delay this process. Therefore, liabilities due on the date of notification are prioritized, while subsequent liabilities fall under Section 11(2)(c).

2. Definition of "Taxes" Under Section 11 of the Special Court Act:

The court addressed whether "taxes" under Section 11 includes penalties and interest. The Learned Advocate General argued that penalties and interest are distinct from taxes, supported by various legal texts and case law. The court referred to Kanga & Palkhivala's Law of Income-tax, which states that penalties are not additional taxes and are distinct from tax and interest. The court also cited the Supreme Court's rulings in C.A. Abraham v. ITO and CIT v. Bhikaji Dadabhai & Co., which differentiated between tax, penalty, and interest.

The court concluded that the term "taxes" in Section 11 does not include penalties and interest. The Special Court Act explicitly prioritizes "revenue, tax, cess, and rates," and does not extend this priority to penalties and interest, which are conceptually different from taxes.

3. Levy of Penalty and Interest on Notified Parties After the Date of Notification:

The court examined whether penalties and interest could be levied on notified parties after the date of notification, given that their properties are attached and they cannot deal with them. The court compared this situation to bankruptcy or winding-up, where penalties and interest are typically not imposed after the insolvency declaration.

The court cited various cases, including Baroda Board & Paper Mills Ltd. v. ITO and ITO v. Official Liquidator, which held that penalties and interest could not be recovered after winding-up. The court concluded that penalties and interest should not be levied on notified parties after the date of notification if the inability to pay was due to the legal disability imposed by the Special Court Act. The court emphasized that if a notified party could have paid their liabilities but was prevented by the notification, they should not be liable for penalties or interest.

Conclusion:

The court's judgment clarified that the priority of liabilities under Section 11 of the Special Court Act applies to amounts due up to the date of notification, the term "taxes" does not include penalties and interest, and penalties and interest should not be levied on notified parties after the date of notification if their inability to pay is due to the legal disability imposed by the Special Court Act. The court directed the Custodian to appeal to the Supreme Court for final determination of these vital questions.